Chapter 5, Solutions Cornett, Adair, and Nofsinger

FVA48 due = $4,591.70 × (1 + 0.12/12) = $4,637.61

PVA48 due = $2,848.05 × (1 +0.12/12) = $2,876.53

LG75-29 Compound Frequency Payday loans are very short-term loans that charge very high interest rates. You can borrow $250 today and repay $300 in two weeks. What is the compounded annual rate implied by this 20 percent rate charged for only two weeks?

20% for two weeks needs to be compounded 26 times to form a year.

(1 + i)26 – 1 = (1 + 0.20)26 – 1 = 113.475 = 11,347.5%

LG75-30 Compound Frequency Payday loans are very short-term loans that charge very high interest rates. You can borrow $500 today and repay $575 in two weeks. What is the compounded annual rate implied by this 15 percent rate charged for only two weeks?

15% for two weeks needs to be compounded 26 times to form a year.

(1 + i)26 – 1 = (1 + 0.15)26 – 1 = 36.857 = 3,685.7%

LG85-31 Annuity Interest Rate What’s the interest rate of a 5-year, annual $5,000 annuity with present value of $20,000?

Use equation 5-2 and solve for i:

or TVM calculator: N=5, PV=-20,000, PMT=5,000, FV=0, CPT I = 7.93%

LG85-32 Annuity Interest Rate What’s the interest rate of a 7-year, annual $4,000 annuity with present value of $20,000?

Use equation 5-2 and solve for i:

or TVM calculator: N=7, PV=-20,000, PMT=4,000, FV=0, CPT I = 9.20%